A currency carry trade generally borrows or sells a lower-yielding funding currency and holds a higher-yielding currency or asset. The potential return comes partly from the interest-rate difference. The trade can still lose money if exchange rates move against it or financing and transaction costs outweigh the yield.

Where the carry comes from

Investors compare the return available in two currencies, including the cost of funding, forward pricing, fees and any hedge. A simple headline rate difference does not equal a guaranteed profit. Forward rates reflect interest-rate differentials and other market pricing, so the cash-and-derivatives route can behave differently from an unhedged spot position.

The BIS describes carry trades as cross-currency positions that can involve leverage and low-volatility assumptions. The realized outcome depends on price changes and how the position is financed, not just the initial yield gap.

Currency moves can overwhelm yield

If the higher-yielding currency falls enough against the funding currency, the exchange-rate loss can exceed the interest earned. The reverse can occur too. A sudden change in policy expectations or risk appetite can make a crowded trade difficult to exit at the expected price.

Leverage magnifies both sides of the result. If many investors reduce similar positions at once, the need to buy back funding currencies can amplify exchange-rate moves. A 2026 BIS analysis discusses how carry-trade unwinds can shape the exchange-rate response to monetary policy.

Separate the components before comparing

Compare the relevant currency pair rates and examine the price history, but remember that a chart does not include your financing rate, broker charges, collateral rules or forward points. Those terms depend on the product and provider.

A carry trade is a risky market position, not a cash-and-carry guarantee. Changes in exchange rates, volatility, funding availability and margin requirements can all alter the outcome. This explanation is educational, not a trading recommendation.

For further reading, see the BIS analysis of monetary policy transmission and currency carry trades.